At a recent Barron’s conferences for the nation’s top advisors, we were surprised by a recurring topic: Amazon.com. Everywhere we turned, someone was discussing how Amazon.com was impacting their businesses. The online retailer, at least since we last checked, has not entered the financial advisory business, but many advisors said Amazon had changed people’s expectations about how they interact with companies. The issue looms over the securities industry.
We regularly hear from leaders of major banks who are worried they could be dis-intermediated if big technology companies enter financial services. For years, these executives were insulated from such competition because technology companies were repelled by Wall Street’s regulatory complexities. But this seems to be changing. Apple announced in May that it was working with Goldman Sachs on credit cards. If the relationship is successful, the financial services industry could face even greater competitive pressures.
After all, technology companies benefit from most everything the financial services industry lacks: hipness, ease of use, and trust. Even Facebook remains in good standing after a major privacy breach that saw the founder, Mark Zuckerberg, keel hauled in front of Congress and the European Union’s Parliament.
Technology threats may seem like a distant concern for some, but where you stand depends on where you sit. The average advisor is around 50, and their clients are likely of similar demographics. But this is one of those moments when it is important to look beyond the present and to anticipate what tomorrow may bring.
It has been said that one needs 10,000 hours of study or practice to master a skill. As the world becomes increasingly specialized, time is always at a premium, and so is knowledge needed to make good decisions. And this is where we think technology plays an important role. Through the latest developments in software engineering and machine learning, those 10,000 hours of study can be democratized. This will ultimately lead to profound improvements in how John and Jane Investor interact with the markets, and how John and Jane Advisor interact with clients, and even with their own businesses. It’s easy to forget that retail participation, at least in America, is a relatively new phenomenon that really began to spread around 1975 when changes to the tax code and Wall Street’s fixed commissions, and ultimately a shift from corporate pensions to self-defined retirement plans, brought Wall Street to Main Street. Yet, the gap between both communities remains unusually wide. Anyone who narrows that gap – even if it is just a little – can create value for themselves and their clients. Consider risk management, which is often difficult for non-professionals to understand and implement.
In the institutional community, investors are always focused on how much risk they are taking to realize a return. If a fund manager returned 30% in a year, and his benchmark realized half as much, his firm would ask how much risk was taken to realize that return. On Main Street, it is usually the opposite. This is, in many ways, the ying and yang of markets. It is, at the risk of over simplification, why some people know to sell at tops, and others do not. It is why some people buy at bottoms, and others panic. This cycle will never fully be eliminated, but technology can help manage the cycle.
At StratiFi, we believe that the way to win is by limiting losses. So, we expose areas in portfolios that could result in losses, thereby allowing advisors and clients to proactively re-adjust risk. The way it works is that advisors seamlessly upload client portfolios into our system. We then assign a risk score on a scale of one to 10 to four key factors: volatility, diversification, tail risk and concentrated-stock risk. We finally assign a total risk score also on a scale of one to 10 for the portfolio. Advisors can do this for individual portfolios, groups of households and also for their entire practice. This simplification down to a single number is powerful because it abstracts the complexity of all the calculations behind the scenes that we mere mortals, unfortunately, often cannot process due to our limited processing power. In essence, technology has created a relatively simple process that is otherwise beyond the purview of all but the most sophisticated investors.
As you know, risk management is 24/7 practice among a. They watch risk levels throughout the day, and then as the markets close spend an hour or more analyzing the risk on the books. This is a key reason why institutions and banks are so profitable. We believe the absence of risk management is a key reason why so many individual investors struggle. They are always focused on the big score, and they do not realize the good investor rule, namely that bad investors think of ways to make money, and good investors think of ways to not lose money.
But technology is more than just the narrowing of intellectual borders – it is experiential. Let us return to Amazon. In 1997, the stock was priced at $17 for its initial public offering. It is now around $1700. Since then, Amazon has changed what people expect of all other services. We think that has profound implications for what we do, and for what comes next. If you are on the sidelines of technology, debating if it is, or is not, for you, rest assured that your customers are deciding, and if your customers are somehow agnostic, we guarantee you their children are not.